CBS-Viacom Merger Offer Puts Spotlight on Price, Exec Structure

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Matt Furman

Wall Street analysts and an executive search expert weigh in on what the first CBS deal proposal means for the negotiations between the parties ahead.

When CBS Corp. and Viacom on Feb. 1 unveiled that they were forming independent committees of their respective boards to once again consider a potential recombination, several Wall Street analysts and bankers wondered whether a deal could be reached this time after a previous attempt had been abandoned in late 2016.

After all, different views on Viacom's value were understood to be a key issue in 2016 along with questions about the management structure after a merger. And CBS Corp. chairman and CEO Leslie Moonves has long emphasized that the company has no interest in forcing deals and doesn't need any to be successful, pointing to its financial performance over the years and the popularity of its content.

With an independent committee of CBS' board now having submitted its first offer for Viacom, news that emerged after the stock market close on Monday, it seems clear that price and personalities will again be the key topics of negotiations in the coming weeks as the two sides see if they can hammer out an agreement to recombine the two companies that were split in 2006.

After all, sources familiar with the offer said the offer put a below-market price, based on a ratio of the two stocks, on Viacom, and called for CBS management, led by Moonves and COO Joe Ianniello, to run the merged company, with one source saying the proposal focused on keeping CBS' existing leadership in place to keep things clear and simple along the old adage "never change a winning team."

But Viacom and CBS Corp. vice chair Shari Redstone, whose family controls both via National Amusements, is understood to want executives from both firms, namely Viacom CEO Bob Bakish, to have roles after a potential deal to leverage the expertise and knowledge available on both sides. It is widely known that she has been high on Bakish's work and his people- and creativity-centric management style since his rise to the CEO role.

Analysts in first reactions predicted that Viacom's independent board committee would likely reject the price offered in CBS' initial bid as too low and push for a premium and likely also urge CBS to find a way to retain Bakish given the early success of his team's turnaround efforts and knowledge of and experience with Viacom's assets.

With CBS' initial offer putting a price on Viacom that, when it was made at the end of last week, fell below the latter's more than $12.5 billion market value, Wall Street watchers predict tough negotiations to come. One banker who spoke on the condition of anonymity said the below-market proposal was a surprise in so far as offers usually come with a price premium, but he highlighted that it was just the opening move in a longer game of chess and argued that CBS likely wanted to use the low-ball starting bid to signal to Viacom and investors it would be financially prudent in the deal negotiations. 

Several analysts have in recent weeks said they expect CBS to put a small premium on Viacom compared to the latter's stock market valuation in a potential deal.

"With Viacom [stock] down 2 percent year-to-date and CBS down 12 percent, we think investors ... believe Viacom will be merged at a premium," RBC Capital Markets analyst Steven Cahall wrote in a March 27 report. "There are arguments on either side, and we conclude that Viacom will likely get some premium because: 1) CBS management cares more about control than price (within reason), and wants to get the deal done and move on; 2) it arguably helps avoid shareholder lawsuits; and 3.) it compensates Viacom for the impact of turnaround efforts."

Needham & Co. analyst Laura Martin on Tuesday said, though, that CBS' below-market first bid "is good for CBS shareholders in the near term." After all, it means that the proposed deal "doesn't pay Viacom as much for upside CBS will create, it makes it less likely that CBS will buy Viacom, thereby potentially luring back investors who preferred CBS when it was a pure-play broadcaster," and it "adds credibility with Wall Street because a low purchase price supports CBS' claim that it doesn't need more scale to win."

Beyond price tags, personalities will also feature heavily in the final deal talks, according to bankers and analysts. Analysts have widely predicted that CBS was planning to offer that Moonves, who is widely considered one of the most successful entertainment industry CEOs and whose current CBS contract runs through mid-2021, would lead the combined company for a while. Under the first CBS offer, he is understood to get a chance to do that for at least two years, something analysts believe Viacom to have expected and be willing to accept.

What is expected to cause more debate is the proposal that Moonves would pick his top management team and keep his current second-in-command Ianniello as his key lieutenant, while Viacom and Redstone reportedly wants Bakish as the no. 2 executive at the merged firm.

What speaks for Ianniello is his track record of working well with Moonves and general best practices in deal-making. "Any successful M&A transaction must be founded on sound financial, strategic and marketplace conditions. Part of any basic due diligence will consider the senior management teams on 'both sides' of the transaction," William Simon, senior client partner at executive search firm Korn/Ferry International, told THR. "Historically, the 'acquirer' generally ends up with most of the senior leadership positions."

He continued: "In this case, CBS under Mr. Moonves' leadership appears to be the 'acquirer' and thereby is likely to be requiring control over these senior leadership decisions. He likely believes that he controls the stronger assets, the stronger balance sheet and the stronger future." And Simon said that "Moonves appears to have the leverage to require such control in order to make this deal." 

Ianniello not only has the support of his boss, but also the benefit of being able to point to CBS last year extending his employment contract through the end of June 2022. "Joe’s role in CBS' success these past several years has been extraordinary,” said Moonves at the time Ianniello was elevated from the CFO role to COO in 2013. “He’s been a game-changing CFO, but he’s also so much more than that. He is a tough negotiator, a great manager and someone who brings energy, passion and a great sense of teamwork to anything he does."

Plus, Ianniello has Viacom experience. Before the split of CBS and Viacom, he held several roles at the latter, including that of senior vp and treasurer and vp corporate development. And there is a financial incentive for CBS to keep him in a top post as his contract allows him to leave with a big payout if CBS fails to recommend him or its board fails to ratify him as president by Dec. 31 or in a couple of other cases. Those include "the appointment of a person other than yourself or Leslie Moonves as president and/or chief executive officer of CBS (including, for the avoidance of doubt, any such appointment that occurs either before or after an appointment of you as president)" and "a material reduction in your position, titles, offices, reporting relationships, authorities, duties or responsibilities."

What speaks for Bakish to end up with a role at the merged company is his early success at Viacom and knowledge running it after overseeing its successful international business.

A source said that a structure suggested to THR by one media investor, namely making Bakish and Ianniello co-presidents reporting to Moonves, won't work under the terms of Ianniello's contract. 

What speaks for Bakish remaining at Viacom is his success at getting people excited to work at and with Viacom again after the departure of former CEO Philippe Dauman. "New Viacom is not the old Viacom," J.P. Morgan analyst Alexia Quadrani wrote in a recent report. "Executives and agents we met with were notably more positive on working with Viacom, describing the tone and tenor of the company as completely different. Viacom cable networks and Paramount were said to be easier to do deals with and were also more talent friendly."

One Wall Street expert to have expressed her support for Bakish as the best person to run Viacom's businesses and his expertise in the past is Wells Fargo analyst Marci Ryvicker. "We don’t know how Les could run these assets better than Bakish," she wrote in a February report. 

Others predict it will need more negotiation to figure out a management setup that everyone can live with. "Given the divergent fortunes of both companies, we anticipate some very intricate challenges in formulating a governance structure to appease the various stakeholders, and in particular, the three named parties — Moonves, Bakish and Ianniello," CFRA Research analyst Tuna Amobi told THR. "In the near term, it would seem that Moonves has a better chance to be designated to lead the combined company given his track record at CBS and reputation with the investor base."

He continued: "Even so, I would be very surprised if Bakish does not feature in some kind of interim power-sharing arrangement — given an international pedigree and well-articulated strategic vision for Viacom that could ultimately have him lead the combined company. Iannello’s role seems a bit more tenuous, but his contractual provisions could play in his favor though unlikely to be a 'deal killer'."

Given that consolidation has been a big theme across the entertainment industry and the business continues to change quickly in the digital age, some say a deal is more likely now than in the past despite what are expected to be tough negotiations. "There is a clear bias for a deal to get done," Jefferies analyst John Janedis wrote in a Monday report. "The challenges on the traditional media distribution models are all very real, though the solutions outside of scale don't necessarily guarantee successful outcomes."

And even if CBS and Viacom do not reach a merger agreement, someone else could consider approaching the companies for an alternative deal, the analyst suggested. Explained Janedis: "It will be interesting to see to what extent a stalemate could translate to other potential bidders for either asset."